Stop Orders and Options

I have placed a few stop orders in the past for some of my option positions but I have just placed limit orders more often in order to catch a particular profit level. As a result I was never totally sure of how the stop orders were executed.

I watched an order that I placed today on a position that I was looking to get out of. Maximizing profits was not my goal so I set a stop order. The spread was 30 cents and the bids ranged from $4.50 to $4.70 near the start of the day.

I noticed that, unlike a stop on a stock position, the stop was not triggered when the bid price hit the stop price. Stock stop orders get executed as market orders as soon as the bid hits the stop.

My stop was set for $4.50 and I moved it up to $4.60 as the bid moved up. I was trying to get hit but wanted to see how the execution occurred as the price moved so I kept my stop at the bid.

I eventually got hit and the position closed at $4.30. Seeing as the spread was 30 cents and upon checking the bid at the time of the order execution, it was $4.30.

So, as I suspected, the stop orders get executed when the ask hits the stop, not when the bid hits.

This certainly makes difference in how I will choose to place stops in the future as losing the spread all the time is not really what I have in mind.

For the record, VTSOs do not work, which makes sense as the trailing stop is set by the last trade price and options may not trade all day while the prices fluctuate wildly. I think that the VTSO could be easily tied to the bid or ask but that would take the broker changing their platform to accommodate this. I suspect that the market (NYSE, AMEX etc) will not support a VTSO directly and Questrade does not handle orders as they are strictly a direct access discount broker. The most they do is to hold GTC orders over.

Jeff.